When Patents Become “Financial Assets”: Megabuck Patent Trolls and the Conflict Between Production and Finance


August 27, 2006


Browse in Intellectual Property

A little over a century ago, in the wake of the crash of 1895, Brooks Adams, brother of the more famous Henry, set out to understand the role of money and finance in the larger sweep of human history.  The result was a book, The Law of Civilization and Decay, which rightly has been called a neglected American classic.

To simplify greatly, Adams saw in Western history a chronic conflict between two economic types – those who produce wealth in actual things on the one hand, and those who conjure gain out of an abstraction of wealth called money on the other. When a society is vital, Adams observed, the producer is ascendant.  But when the financial type gets the upper hand, it generally signals a decline.  Which brings me to Nathan Myhrvold, the first technology chief of Microsoft, and his new company Intellectual Ventures.

Actually I skipped a few beats there, to get to Myhrvold before the jump.  I should have noted that yes, the decline of the West was a prominent theme in the late 19th century, not least among the Adams brothers themselves.  And yes, the epochal dramatics could go a little too far.  But none of that refutes the essential truth of Adam’s insight about production and finance.  While Myhrvold is not setting up a bank, moreover, he represents the banking type in that his goal is not to make things but rather to make money by amassing a large number of legal rights to the ideas for things.

In other words he wants to deal in patents, which are the coinage of the “knowledge economy.”   (Almost literally so, because like coins they are issued by the state.)  According to a recent article in Business Week (July 3rd, 2006) Intellectual Ventures will do its amassing in two ways.  For one, it will bring together smart people from a number of fields that have large payoff potential, such as medical technology.  They will sit in a conference room and spin out ideas; a patent lawyer will take notes and rush to the Patent Office with any that are promising.

Myhrvold’s “ambitious goal,” Business Week observes, “is to own the next generation of transformative technology in some of the world’s fastest-growing industries. Over the past three years, Intellectual Ventures has held about 70 brainstorming sessions. The result: 500 patent applications in areas including optics, biotechnology, robotics, e-commerce, and mobile networking.”  Which means that, in years to come, if you want to do something innovative in one of those fields, you might well have to go to Myhrvold, checkbook in hand.

Track two will be larger and more prosaic: IV will buy existing patents from owners who want to cash out.  In fact it is doing so already.  “Armed with its billion-dollar war chest, IV has stockpiled thousands of patents, according to Myhrvold, who will not disclose the precise number.”  He buys these patents the way slumlords buy real estate – through shell corporations, so that his role cannot easily be traced.

As Business Week points out, this growing patent hoard could enable IV to become the “world’s biggest patent troll” – which is to say, a company that uses patent claims to shake down others for cuts of lucrative businesses.  Myhrvold denies any such intent; but it practically is imbedded in his business model.  Set up a company to make money from patents, and it won’t be long before you start siccing your lawyers on infringers, however tenuous your claim.

A recent article in the Wall Street Journal (Aug 23, 2006) provided a glimpse at what happens when patents become financial instruments in this way.  It concerned the litigation over the Blackberry, the popular hand-held email device.  The company that makes the Blackberry, Research In Motion, was hit by an infringement suit that almost shut down its entire network.  RIM settled in March for $612 million dollars.

But it turns out that the holding company that won this settlement itself has a questionable claim.  The story is Dickensian in its convolusions. But basically the man behind the lawsuit was the lawyer for the company that held the original patent.  He came into possession of it in the course of a bankruptcy proceeding that was not, it appears, entirely according to Hoyle.  Now the offspring of the owner of that business are suing the lawyer for their share of the $612 million.

So it goes in an “economy” in which patent claims start to become as pervasive as finance itself.  This has become such a concern in Silicon Valley – especially as embodied by Myhrvold and IV — that Apple and Intel among others have formed a new organization called Coalition for Patent Fairness, to seek protection against patent trolls.  (The Blackberry case was far from the most egregious.)  Myhrvold calls CPF ‘the infringers’ lobby,” not without reason.  Such companies do use their legal muscle to trounce small inventors when they can.

But given what Myhrvold has in mind, it is tempting to root for the big boys anyway.  A humongous patent troll is just one concern.  If Myhrvold amasses enough patents, he could become a kind of innovation czar as well, determining which technologies move forward and which ones don’t.  The auto industry once stymied the development of fuel-efficient engines by buying up patents for them.  Something like that could happen on a much larger scale.

All of this is a many miles from the intent of Madison and Jefferson when they drafted the Copyright and Patent Clause of the Constitution. They had in mind a freewheeling culture of innovation, not a Petri dish of litigation and a state-enabled monopoly of the mind. Innovation Ventures violates their world view in an even more fundamental way, in that it turns the patent system itself into a branch of finance rather than of industry and production.

Myhrvold aim is to turn ideas into Wall Street commodities, fungible and interchangeable on computer screens.  He wants to make them an “asset that people and companies will invest in, the same way they do in real estate and stock,” as Business Week explains.  Liquidity is something that sets the financial type atwitter. It strips away all the messy human particularity, and leaves just a quantitative abstraction, amenable to arcane math, which is the true theology of the financial mind.

But such monetary abstraction comes at a cost that tends to be off the bandwidth of such minds.  What happens to a nation in which the creative juices of the workshop turn into the cold calculus of the bank  — that is, when the producer becomes subsumed to the financier?  What happens when the particularities of this thing we call “the market” give way to an abstract and mathematical representation of it?   We don’t really have a language for discussing such problems, let alone a calculus for reckoning them.

But they are real, and much I suspect of what underlies the opposition to Wal-Mart, and to corporate globalism in general.  This opposition is more than a matter of low wages, job flight, and the like, important as those are.  Underneath there is a brooding concern about the mentality that corporate globalism represents – a mentality that is unhinged from particular places, people and products, and that has spun off into the realm of monetary abstraction in which all those things are fungible and therefore in line for liquidation.

The worship of liquidity leads ultimately to liquidation.  Talk about food with a farmer at your local farmers’ market.  Then engage the president of Wal-Mart, if you could get an audience with that person,  on the same subject.   One will speak of materials and production – of things he has touched.  The other will speak in the distant abstractions of business and finance.  Life becomes disposable, liquidatable.  A passion for people and things becomes a passion for quantitative abstraction. The difference defines the chasm into which the financial mind is taking us.

That chasm has large implications.  As Adam Gopnik points out in a comment in the August 28th New Yorker, war and terrorism are connected closely to ideology and abstraction.  He quotes Albert Camus, who is on the President’s reading list this summer (the published one at least.)  “We have witnessed lying, humiliation, killing, deportation, and torture,” Camus wrote of the struggle for Algerian independence.  “And in each instance it was impossible to persuade the people who were doing these things not to do them, because they were sure of themselves and because there is no way of persuading an abstraction, or, to put it another way, the representative of an ideology.”

I wonder if there’s a connection between the habit of abstraction in corporate globalism, and the corresponding habit in Islamic jihad.  They both reduce actual people and things to projection screens for their respective ideologies.  In his book The Lexus and the Olive Tree, Thomas Friedman tells of a visit to a Wall Street bond trader whose operations span the globe.  As he sits before the computer screens, watching the abstractions of finance, there is a tone of reverential awe, as though he has gained entrance to the ark itself, and been permitted to behold Holiest of Holies.

This is indeed the ultimate reality of corporate globalism, the flow of monetary abstraction unimpeded by locality and place, and stripped bare of human content or implication. It also is the worldview into which the Myhrvolds want to drag the energies of creativity and invention.  He says he wants to support those energies with finance, which cannot entirely be discounted.  Invention does need capital.

But finance on this scale, distributed in this way, alters what it touches, and generally subordinates it.  Myhrvold alone is not to blame.  Someone was bound to do this sooner or later.  When the financial mind is dominant, as it is in America today, it turns everything into an extension of itself.  The patent system, as it currently stands, has been ripe for this plucking.

This is the kind of shift of which Brooks Adams was writing, “knowledge economy” version.  You can feel it, even if you can’t explicate every last detail.  Madison and Jefferson were on the production side. They were suspicious of finance and of its champion Alexander Hamilton. The Copyright and Patent Clause was part of their effort to establish a legal framework for an economy based on real production, in which money was a means and metric, not an end.

Jefferson was the first Commissioner of Patents, and he insisted that applicants submit actual models of their inventions.  Descriptions concocted around conference tables and written up by lawyers for the benefit of wouldn’t have done it. Financial minds today dismiss such thinking as primitive.  We’ll see.

In the end Intellectual Ventures is a case study in the need for reform of the patent system.  This reform shouldn’t just cater to the desires of the big boys, by handcuffing authentic claimants against them.  It needs to gear rewards more to real inventors and producers, and less to those who game the system and concoct gain out of paper the way bankers do  There also needs to be a lot more public financing of R&D, with results that go directly into the public domain.

But meanwhile, we should not give up on our fellow humans.  Sometimes a bad idea opens the way to a better one.  What if a Jeffersonian bulb were to off in Myhrvold’s mind?  What if he changed course, and brought together the best minds to think up answers to the worlds most pressing technological problems, though not necessarily the most remunerative ones.  What if he patented these, and then made them available under a General Public License, which in effect would put them into the public domain?

Then no one could play the role that Intellectual Ventures seems designed to play.  Unlikely, I know.  But the thought precedes the act, so why not dream?